Friday Rant: Will "Prevailing Wage" Prevail

In May of 2007 I purchased a commercial building in the Midwest in a metropolitan area located on the Illinois/Iowa border where the Mississippi river runs east to west. This was the beginning of my plan to establish a "cost neutral" retirement headquarters where I could pursue life without all the stresses associated with the big city and the big corporation.

After a couple of false starts, I became very active in moving this project forward after my "retirement" this year. The City whose downtown property I planned to rehabilitate was very active in letting me know the various financial incentives they would provide. This of course, was very attractive, especially for a former "Procurement guy" and the incentives offered were about 20% of the total project cost ... who wouldn't get excited about that! The incentives included monies for energy efficient windows and HVAC, no sales tax for all goods purchased, façade improvement credits and up to $20,000 for newly created residential units.

As I had received a zoning variance to create either commercial or residential space, and because my plan was to devote two thirds of the building space to residential living, the City's generous offer was very exciting and one of the reasons I decided to finally move forward with the plan.

I hired a first class architect who developed a fantastic plan. I then hired a top notch general contractor to lead the project. One of his first assignments was to make sure we were doing everything necessary to qualify for all the available financial incentives. And this is when my education about "prevailing wage" started to take place.

Prevailing wage is defined as "the median wage paid to workers in a specified locality". Federal legislation such as the Davis-Bacon Act requires that all federal government construction contracts, and most contracts for federally assisted construction over $2,000, must include provisions for paying workers on-site no less than the locally prevailing wages and benefits paid on similar projects. So here's what that means in the city where my project is currently underway, accordingly to the local prevailing wage table of June 2009.

A residential carpenter, of which I have a few, would be compensated with an hourly wage and per hour add-on benefits totaling an additional 50% of the hourly wage. In this case, the prevailing wage was 213% greater than what I'm actually paying. I obviously turned down the City's generous $20,000 incentive, because in my situation if I was paying prevailing wage my net loss after accepting the city incentive would have been $100,000.

Now I believe in paying a fair wage! The average income in the City I'm doing my project in is about $18,500/yr. The annualized pay rate I am paying my carpenters is around $30,000/yr. I believe I'm being very fair (I certainly have not received any complaints as the folks working on my project seem genuinely pleased with having the work) and I call what I'm paying the "competitive market wage"

As a long time proponent of "free markets", I really struggle with the idea of a "prevailing wage". It seems to me that a prevailing wage is something one might expect in a socialist country where there is a belief that government intervention in all aspects of a person's life and livelihood is necessary.

I can think of a number of pretty significant negatives associated with the idea of a prevailing wage. They include but are not limited to creating a non-competitive environment (why be better than the next guy if everyone is paid the same), creating more builder debt increasing the chance of financial failure and limiting the amount of expansion that can be afforded which can limit the amount of new jobs created or other wealth creation indicators.

So I've come to believe that the City has a program that will have no impact on their desired goal of increasing the residential capacity of the downtown area. Who would want this "expensive" money. My understanding is that no one in the past year has taken the incentive. And even crazier, the money being offered is coming from my City Real Estate Taxes.

I write about this because I'm deeply troubled by programs and laws that help to prevent our country from being competitive. I'm wondering how many other SpendMatters readers are faced with similar challenges in your working environments that contribute to your inability to effectively sell both goods and services.

Gregg Brandyberry

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